3 small business administration loan programs to finance your franchise

Franchises are a simple and effortless way to jump right into the corporate world, to finally be your own boss.

Additionally, franchises are probably the easiest businesses to finance because they typically don’t carry many of the upfront risks (unknown risk) that banks and other commercial lenders tend to avoid. Since most franchises have strong brands, proven profitability, and cash flow histories, and tend to perform well in almost any location (globally), these business models have a propensity to fly through the process of underwriting loans and going from application to financing in no time. flat weather.

In fact, the Small Business Administration (SBA), hoping to speed up its financing process and fund more franchise loans, has created a list of “SBA-approved franchises,” a list of franchises that the SBA has already reviewed through their underwriting process. .

According to Jim D, former moderator of the website;

“SBA-approved franchises are select business opportunities whose agreements have been accepted by the SBA. When it comes to obtaining an SBA-backed loan, it is easier and faster for applicants for an approved franchise. Applicants for approved franchises by the SBA benefit from a streamlined review process that streamlines their loan application. Because the particular franchise is pre-approved, the loan review is less complex and focuses on specific aspects of that brand business plan. “

So if the SBA is so into franchises, what loan programs do they offer?

3 SBA franchise loan programs

The first is the first. The SBA does not provide loans directly to business or franchise owners. Therefore, you will still need to take your loan application to an SBA bank or financial institution. However, these originations also know that the SBA likes proven franchise business and are more than willing to review and process your application.

When looking for an SBA loan for your franchise, you should focus on your specific financial needs and combine them with the SBA loan program as follows:

  1. SBA 7 (a) loan program: This is the SBA’s flagship program designed to fund almost every aspect of a business.

According to the SBA, the 7 (a) loan program can be used:

  • Provide long-term working capital to pay operating expenses, accounts payable, and / or purchase inventory.

  • Short-term working capital needs, including seasonal financing, contract enforcement, construction financing, and export.

  • Revolving funds based on the value of existing inventory and accounts receivable, under special conditions

  • To buy equipment, machinery, furniture, fixtures, supplies or materials.

  • To buy real estate, including land and buildings.

  • To construct a new building or renovate an existing building

  • To establish a new business or assist in the acquisition, operation or expansion of an existing business.

  • To refinance existing commercial debt, under certain conditions.

This program has a maximum loan amount of $ 5 million with the average, in 2012, the last published figure, which is around $ 337,730.

Since most SBA loans come with longer loan terms, making monthly payments even more affordable, real estate loan maturities can extend to 25 years, up to ten years for equipment, and up to seven years for working capital.

Now, all SBA loans are assumed to be fully secured by business or personal assets. However, while the SBA expects this, they will not decline a loan based solely on the lack of adequate collateral.

Lastly, know that these loans require the borrower to provide 20% or more as a down payment or their own principal on the deal. Therefore, the SBA will only guarantee 80% of the amount needed.

As you should be able to see, this SBA program can cover almost all franchise financing needs, from real estate purchase and development to business equipment and working capital needs. So if that’s what you need to buy or grow your franchise, start here.

  1. CDC / 504 Loan Program: The 504 loan program, like the 7 (a) program, is great for franchises. However, this program is limited to the purchase of real estate and equipment only.

According to the SBA, the 504 loan program can be used for;

  • The purchase of land, including existing buildings.

  • Buying improvements, including grading, street improvements, utilities, parking lots, and landscaping.

  • The construction of new facilities or the modernization, renovation or reconversion of existing facilities.

But, the real benefit of this loan program is that the amount of principal or down payment that is required from the borrower is less, usually around 10%, so it requires less out-of-pocket costs.

How this program works. This program was designed to help facilitate additional business growth and development within community areas. Therefore, when a 504 loan is applied for and approved, a local Community Development Corporation (CDC), the community portion of the loan, will finance and guarantee up to 40% of the loan application, a local SBA approved bank will finance 50% of the loan application leaves the remaining 10% of the borrower. Three partners all working towards the same goal: the long-term success of your franchise.

This program can provide up to $ 5 million for businesses that can and will create jobs in the community, up to $ 5 million for businesses that provide stated public benefits, such as energy reduction or alternative fuels, as well as rural development businesses, minorities, women. or veteran companies, export companies, just to name a few, are declared targets that are known to have a public benefit and as such the SBA wants to fund these companies. And up to $ 4 million for small manufacturing businesses that create jobs.

Finally, to make these loans and the resulting payments more affordable, ensuring the borrower’s long-term success, the SBA will allow loan terms of 10 and 20 years.

  1. SBA Express Program: The SBA express program is like the little brother of the SBA 7 (a) loan program with several benefits and restrictions.

First, this program offers an expedited review process. In fact, the SBA guarantees that your express loan request will receive a response in less than 36 hours. But while you may receive a response, this does not mean that you will receive an approval. It just means that you will know that the SBA has received your application and will usually ask for additional information at that time, but at least you know that it is being worked on.

Second, the maximum loan amount under this program is only $ 350,000. Which isn’t a lot these days, but it might be enough to get you into your dream franchise, especially when compared to the average full 7 (a) program loan amount of around $ 337,730.

Third, the SBA will only guarantee up to 50% of the loan amount, which means that more of the risk of the loan will fall on the bank or lender. However, if your deal is strong enough, this 50% guarantee could be the difference between approval and denial.

Lastly, these loans offer loan terms of up to 7 years only and can be used for almost any business capital need.

What is a small business?

Now, to qualify for an SBA loan, your franchise must meet the SBA small business definition of:

  • Be lucrative.

  • Have up to 500 employees, up to 1500 for manufacturing.

  • Have less than $ 21 million in annual revenue, less for certain companies or industries.

That will fit almost all individual franchise businesses.


Franchising is a great way to enter the business world with a well-known and proven business model. However, like almost every company on the planet, financing this franchise, either to start it up or to make it grow, remains a difficult obstacle to overcome.

However, as noted and hopefully shown, franchises tend to get more favorable approval rates when using government guaranteed financing programs like these SBA loans. And it’s not just that the SBA views these types of businesses encouragingly, but so do banks and other commercial lenders – those other partners needed to get your SBA loan approved and funded.

However, whether or not your chosen franchise is on an SBA approved list and your loan application and use of funds meet these criteria does not mean that you will be automatically approved. The only way to know for sure if you and your franchise will be approved is by applying. And since you have to apply no matter which option you choose, you can also apply with a financial organization or business funder that already works with the SBA; it can only double your chances of raising the capital you need to fully realize your franchise. Dreams

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